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Draft decision on amendments for customised price paths

Draft decision on first fast track amendments for customised price paths

The Commerce Commission has today published draft amendments that would provide more flexibility for gas and electricity distributors when applying for a customised price-quality path (CPP).

Electricity distributors and gas pipeline businesses are subject to price-quality regulation. Default price-quality paths limit the revenues these suppliers can earn, or the maximum average prices they can charge. After the default path is set, they have the option of applying to the Commission for a CPP that is tailored to their specific circumstances.

Commission Chair Dr Mark Berry said the draft amendments would help make the process of applying for a CPP more cost-effective.

“The benefit of the proposed changes is that suppliers can make a case to have the information requirements better aligned to their existing business practices, reducing some of the time and cost involved in preparing a proposal,” Dr Berry said.

“This draft decision reflects our commitment to reducing the barriers suppliers say they face when considering whether to apply for a CPP, where it is to the long term benefit of consumers.”

Under the draft decision suppliers can apply to be exempt from certain information requirements, or to have the existing requirements modified to better suit their circumstances. They would also be able to apply to use alternative methodologies in some instances where it would have an equivalent effect to what is specified in the input methodologies.

The Commission would work with businesses to ensure the flexibility provided was not at the expense of sufficient information being made available to the Commission to evaluate the proposal and set the customised path.

Following consultation with interested parties, the changes are intended to be available to suppliers applying for CPPs from 2016.

Further information on the input methodologies review can be found here.

The draft decision is part of the fast track process for CPPs announced in July, which forms part of the wider input methodologies review. The CPP fast track advances consideration of amendments to certain rules relating to CPPs to respond to requests from regulated businesses to complete this work ahead of the main review.

Previous releases
This is the fifth media release from the Commission on the input methodologies review.

The first release was issued on 10 June 2015, and related to issuing the original Notice of Intention, and contains all the original background information.

The second release was issued on 16 June 2015, and notified that the Commission had released its first paper for industry and consumer consultation as part of the review of Input Methodologies.

The third release was issued on 3 July 2015, and notified that the Commission had made the decision to fast track the consideration of airport land valuation rules.

The fourth release was issued on 7 August 2015, and notified that the Commission had made the decision to fast track consideration of amendments to certain CPP rules.

What is a customised price-quality path?
Under Part 4 of the Commerce Act, 17 electricity distributors and 4 gas pipelines businesses are subject to price-quality regulation. Default price-quality paths set a cap on the maximum average prices a business may earn in each year of the regulatory period. They include quality standards to ensure businesses do not respond to the regulation by reducing investment in quality of the service. After the default price quality path has been set, a supplier may choose to propose an alternative, customised price-quality path.

A customised price-quality path is a path the Commission can set to better suit the specific needs of a regulated business and those of its consumers. For example, a business may need to invest more in its network than provided for under the default price-quality path or may have been affected by an event outside its control. Customised pricequality paths are based on the Commission’s analysis of information specific to the business, and require indepth audit, verification, and evaluation of the information provided by the regulated business. Orion New Zealand Limited is currently the only supplier on a customised price-quality path.

How do input methodologies apply to customised price-quality paths?
The rules and processes for a customised price-quality path application, including the requirements for a proposal and the criteria we must consider when evaluating an application, are set out in input methodologies determined by the Commission. Input methodologies are rules, processes, requirements and evaluation criteria for services that are regulated under Part 4. The Commission is required to undertake a review of these input methodologies within seven years of setting them. The main review is currently scheduled to be completed in December 2016, however the Commission has decided to review some input methodologies on a fast tracked timeframe.


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